Financial Reporting and Disclosures (F2) Missy

(F2 M4) What is operating profit as it relates to segment reporting? (O)

Operating profit by segments is based on the measure of profit reported to the chief operating decision maker. The basic "formula" is as follows: Segment revenues from sales to internal and external customers - Directly traceable costs - Reasonably allocated costs = Operating profit (loss)

(F2 M7) How is the DuPont return on assets ratio computed and interpreted? (S)

Profit margin x Asset turnover = DuPont return on assets Results in the same ratio as regular ROA, but helps determine what is generating the return. A higher ratio is better.

(F2 M2) Give an example of two recognized subsequent events and two non-recognized subsequent events. (S)

Recognized subsequent events: 1) Settlement of litigation if that litigation arose before the balance sheet date 2) The effects of a customer's bankruptcy (loss on uncollectible receivable) for a debt owed prior to the balance sheet date Non-recognized subsequent events: 1) Settlement of litigation if that litigation arose after the balance sheet date 2) Sale of bond or capital stock after the balance sheet date

(F2 M5) What is Regulation S-X? (O)

Regulation S-X outlines the form and content of and requirements for interim and annual financial statements to be filed with the SEC.

(F2 M4) Describe the 10% test for identifying reportable segments. (B)

Reported revenue, including sales to external customers and intersegment sales or transfers, is 10% or more of the combined revenue (internal and external) of all operating segments. OR The absolute amount of its reported profit/loss is 10% or more of the greater, in absolute amount, of (1) the combined reported profit of all operating segments that did not report a loss or (2) the combined reported loss of all operating segments that did report a loss. OR Assets are 10% or more of the combined assets of all operating segments.

(F2 M2) What are revised financial statements? (O)

Revised financial statements are financial statements that have been revised to correct an error or to reflect the retrospective application of US GAAP. Revised financial statements are considered reissued financial statements.

(F2 M5) What is XBRL? (S)

XBRL (eXtensible Business Reporting Language) is a royalty-free, open specification for software that uses XML (eXtensible Markup Language) data tags to describe financial information for business and financial reporting.

(F2 M4) Name the four required disclosures for segments of an enterprise. (B)

"POMA" 1) [P]roducts and services 2) [O]perating segments (annual and interim) 3) [M]ajor customers (>=10% of revenues) 4) Geographic [A]reas

(F2 M3) Define fair value. (B)

"POMP" Fair value is the [P]rice to sell an asset or transfer a liability in an [O]rderly transaction between [M]arket participants in the [P]rincipal (or most advantageous) market at the measurement date under current market conditions. FV = exit price (amount to get rid of/sell/transfer, NOT to obtain/acquire/assume)

(F2 M1) What are the US GAAP disclosure requirements for risks and uncertainties? (B)

"SNUCk" 1) [S]ignificant estimates (when reasonably possible an estimate will materially change or have a material effect in the near-term) 2) [N]ature of operations (major products/services, principal markets, etc.) 3) [U]se of estimates in preparing the financial statements 4) [C]urrent vulnerability due to certain concentrations

(F2 M4) What items are normally excluded from segment profit/loss? (S)

"eGREGIoUS" 1) [G]eneral corporate [R]evenues and [E]xpenses 2) [G]ains or losses from discontinued operations 3) [I]nterest expense (except for financial institutions) and Income taxes 4) Equity in earnings and losses of an [U]nconsolidated [S]ubsidiary (i.e. under the equity method) and minority interests (NCI) These items are not allocated to divisions solely for the purpose of segment reporting. They may be included, however, if they are included in the determination of segment profit reported to the chief operating decision maker.

(F2 M7) How is the quick ratio computed and interpreted? (B)

(Cash and cash equivalents + Short-term marketable securities + Net Receivables) ÷ Current liabilities = Quick ratio A more liquid/conservative measure of a company's ability to meet its short-term obligations. A higher ratio indicates less risk.

(F2 M7) How is the gross margin ratio computed and interpreted? (S)

(Net sales - COGS) ÷ Net sales = Gross margin Indicates how much profit a company makes after paying off its cost of goods sold. A higher ratio is better.

(F2 M2) When are financial statements considered to be "issued" and "available to be issued"? (S)

(Public) Financial statements are considered to be issued when they have been widely distributed to financial statement users in a form and format that complies with GAAP. (Private) Financial statements are available to be issued when they are in a form and format that complies with GAAP and all approvals for issuance have been obtained.

(F2 M6) What is the formula used to convert cash paid for operating expenses to accrual basis operating expenses? (S)

"COPIALD" [C]ash paid for [O]perating expenses - increase (+ decrease) in [P]repaid expenses ([I]ndirect relationship) - decrease (+ increase) in [A]ccrued [L]iabilities ([D]irect relationship) = Accrual basis operating expenses * opposite of formula used when preparing the statement of cash flows under the direct method ("OPEDALI") NOTE: May be applied to salaries and wages, interest, and income tax expenses.

(F2 M6) What is the formula used to convert cash basis revenue to accrual basis revenue? (S)

"CRADDI" [C]ash basis [R]evenues (i.e. cash received from customers) - decrease (+ increase) in [A]/R ([D]irect relationship) - increase (+ decrease) in [D]eferred revenue ([I]ndirect relationship) = Accrual basis revenues * opposite of formula used when preparing the statement of cash flows under the direct method ("RAIDD")

(F2 M6) What is the formula used to convert cash paid for purchases to cost of goods sold? (S)

"CSI IPD" [C]ash paid to [S]uppliers - increase (+ decrease) in [I]nventory ([I]ndirect relationship) - decrease (+ increase) in A/[P] ([D]irect relationship) = COGS * opposite of formula used when preparing the statement of cash flows under the direct method ("CIDPI")

(F2 M3) Describe the valuation techniques that can be used to measure the fair value of an asset or liability. (B)

"MIC" 1) Market approach - uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value. 2) Income approach - Converts future amounts, including cash flows or earnings, to a single discounted amount to measure the fair value of assets or liabilities. 3) Cost approach - Uses current replacement cost to measure the fair value of assets.

(F2 M7) What are the two liquidity ratios and what do they measure? (O)

1) Current ratio 2) Quick ratio Liquidity ratios are measures of a firm's short-term ability to pay maturing obligations. "Liquidity = Liabilities"

(F2 M7) What are the 4 coverage ratios and what do they measure? (O)

1) Debt to equity ratio 2) Total debt ratio 3) Equity multiplier 4) Times interest earned Coverage ratios are measures of security or protection for long-term creditors/investors. "Coverage = Creditors"

(F2 M6) What are the general guidelines for other comprehensive bases of accounting (OCBOA) financial statement presentation? (B)

1) Different titles from accrual basis financial statements (no GAAP FS titles) 2) Required financial statements are the equivalent of the accrual basis BS and IS 3) Financial statements should explain changes in equity accounts 4) A statement of cashflows is NOT required 5) Disclosures should be similar to GAAP financial statement disclosures

(F2 M7) What are the 7 profitability ratios and what do they measure? (O)

1-3) Return on assets, sales, and equity 4-5) Profit margin and gross profit margin 6) Dupont return on assets 7) Operating cash flow ratio Profitability ratios are measures of the success or failure of an enterprise for a given time period.

(F2 M5) What income tax rate is used in interim financial reporting? (B)

A company should use the best estimate of the effective tax rate to be applicable for full fiscal year on its interim statements. The effective income tax rate should reflect anticipated foreign tax rates, available tax planning alternatives, anticipated tax credits, capital gains rates, and foreign tax credits.

(F2 M5) Who are considered large accelerated filers and accelerated filers for SEC reporting purposes? (S)

A large accelerated filer is an issuer with a worldwide market value of outstanding common equity held by nonaffiliates of $700 million or more as of the last business day of the issuer's most recently completed second fiscal quarter. An accelerated filer is an issuer with a worldwide market value of outstanding common equity held by nonaffiliates of $75 million or more (but less than $700 million) as of the last business day of the issuer's most recently completed second fiscal quarter.

(F2 M6) When converting cash-basis income to accrual basis income, what items are added and which are subtracted?

Add ("GLaD I CAn"): 1) [G]ains on the sale of non-current assets (investing activity) 2) [I]ncreases in [C]urrent [A]ssets 3) [D]ecreases in current [L]iabilities Subtract ("I'LL DANCE") 1) [N]on-[C]ash [E]xpenses (such as depreciation and goodwill impairment) 2) [L]osses on the sale of non-current assets 3) [D]ecreases in current [A]ssets 4) [I]ncreases in current [L]iabilities NOTE: changes in credit balance accounts have an opposite effect on cash flows (indirect relationship) while changes in debit balance accounts have the same effect (direct relationship). NOTE 2: This is OPPOSITE from converting accrual basis net income to cash basis under the direct method of cash flow preparation.

(F2 M7) Discuss the limitations of ratios. (O)

Although ratios are easy to compute, they depend entirely on the reliability of the data on which they are based (e.g. estimates, historical costs, fair value, etc.). Additional information is also valuable when analyzing a company.

(F2 M2) What is a subsequent event and what are the two categories of subsequent events? (B)

An event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued. 1) Recognized subsequent events provide additional information about conditions that existed at the balance sheet date (--> record journal entry and disclose). 1A) + any non-recognized subsequent events that would be MISLEADING to exclude. Ex. retirement of current portion payable of LT debt w/ material issuance of stock (amt retired would be removed from current liabilities (and BS entirely) + note disclosure. 2) Non-recognized subsequent events provide information about conditions that occurred after the balance sheet date and did not exist on the balance sheet date (disclose only).

(F2 M5) What is an instance document as it relates to XBRL? (S)

An instance document is an XBRL formatted document that contains tagged data.

(F2 M4) What is an operating segment? A reportable segment? (S)

An operating segment is a component of an entity that (1) engages in business activities, (2) has its operating results regularly reviewed by the chief operating decision maker, and (3) has discrete financial information available. Reportable segments are operating segments of an entity that meet the criteria for separate reporting.

(F2 M6) What is the "formula" used to calculate accounts receivable? (M)

Beginning balance + Revenue - Collections -Write-offs = Ending balance

(F2 M5) What is the purpose of Form 20-F and Form 40-F? (S)

Both forms must be filed annually by foreign PRIVATE issuers and are similar to Form 10-K. For 40-F is filed by specific Canadian companies registered with the SEC and Form 20-F is filed by other non-US registrants. May be prepared using GAAP, IFRS, or a comprehensive body of accounting principles other than GAAP or IFRS.

(F2 M6) What type of entities may use the cash basis/modified cash basis of accounting? (S)

Cash basis financial statements are generally used by estates and trusts, civic ventures, and political campaigns/committees.

(F2 M7) How is the operating cash flow ratio computed and interpreted? (S)

Cash flow from operations ÷ Current liabilities = Operating cash flow ratio Indicates if a company's normal operations are sufficient to cover its near-term obligations. A higher ratio indicates less risk of distress.

(F2 M3) A change from one fair value measurement approach to another (ex. cost approach to market approach) is what kind of accounting change? (M)

Change in valuation technique is considered a change in accounting estimate.

(F2 M1) When should information regarding concentration risk be disclosed? (S)

Concentrations should be disclosed if all of the following criteria are met: 1) The concentration Exists at the FS date (not just yr end) 2) The concentration makes the entity Vulnerable to the risk of a near-term severe impact 3) It is at least reasonably Possible that the events that could cause the severe impact will occur in the near term

(F2 M4) What components of an entity are never considered an operating segment? (S)

Corporate headquarters and a entity's pension and other post-retirement benefit plans.

(F2 M7) How is the accounts payable turnover ratio computed and interpreted? (S)

Cost of goods sold ÷ Average accounts payable = Accounts payable turnover Indicates the number of times trade payables turn over during the year. A higher ratio tends to be better, but too high may indicate the company is not taking advantage of the interest-free grace period.

(F2 M7) How is the inventory turnover ratio computed and interpreted? (S)

Cost of goods sold ÷ Average inventory = Inventory turnover Measure of how quickly inventory is sold and is an indicator of enterprise performance. A higher ratio is better.

(F2 M7) Define working capital. (B)

Current assets - Current liabilities = Working capital

(F2 M7) How is the cash conversion cycle ratio computed and interpreted? (S)

Days sales in accounts receivable + Days in inventory - Days of payables outstanding = Cash conversion cycle Indicates the average length of time it takes from when the company pays cash for an inventory purchase to when the company received cash from a sale. A lower ratio is better.

(F2 M7) How is the return on sales ratio computed and interpreted? (S)

EBIT* ÷ Net sales = Return on sales * May also exclude effects of interest revenue Used to evaluate a company's operational efficiency. A higher ratio is better.

(F2 M7) How is the days of payables outstanding ratio computed and interpreted? (S)

Ending accounts payable ÷ (Cost of goods sold ÷ 365) = Days of payables outstanding Indicates the average length of time trade payables are outstanding before they are paid. A rate slightly lower than the standard is ideal. Too high may imply problems paying and too low may imply poor cash management.

(F2 M6) What are special purpose frameworks? (O)

Special purpose frameworks, also known as other comprehensive bases of accounting (OCBOA) are non-GAAP presentations that have widespread understanding and support. The cash basis, modified cash basis, and income tax basis of accounting are examples of OCBOA presentations.

(F2 M6) What is the income tax basis of accounting? (S)

Tax basis financial statements are prepared based on the methods and principles used to prepare the entity's TAX RETURN; well-suited for entities with complex operations (compared to use of the cash basis). Special accounting treatment must be given to nontaxable revenues and expenses not reported on the tax return.

(F2 M4) Name the two quantitative thresholds used in identifying reportable operating segments. (B)

The 10% "size" test and the 75% "reporting sufficiency" test.

(F2 M4) What accounting principles are required to be used in segment reporting, and who does segment reporting apply to? (S)

The accounting principles used in preparing the financial statements should also be used for segment reporting. Segment reporting applies to public companies only.

(F2 M5) What are the disclosure requirements for interim financial statements according to Regulation S-X? (S)

Interim financial statement disclosures should be sufficient so that the interim information is not misleading. Required disclosures include (1) material contingencies and (2) events subsequent to the end of the most recent fiscal year that have a material impact on the entity. Because users have access to the most recent annual financial statements, interim reports may omit the summary of significant accounting policies, the details of accounts that have not changed significantly, and any detailed annual disclosures.

(F2 M3) What disclosures are necessary regarding fair value measurements? (S)

1) Quantitative information about significant unobservable inputs. 2) Discussion of the sensitivity of level 3 measurements to changes in unobservable inputs disclosed. 3) Information about non-financial assets and liabilities for which measurements differ from highest and best use. 4) Hierarchy for items that are not measured on the balance sheet but are disclosed in the notes to the financial statements.

(F2 M5) What are the guidelines for interim reporting? (B)

1) Use the same accounting principles that were used in the most recent annual report. 2) Allocate expenses to the interim period(s) benefited 3) Revenues are recognized in the period in which they are earned and realized or realizable. 4) A total for comprehensive income in condensed financial statements of interim periods.

(F2 M7) What are the 8 activity ratios and what do they measure? (O)

1-4) A/R, inventory, A/P, and asset TURNOVER (num = NET IS item; denom = average NET BS item) 5-7) Days sales in A/R, days in inventory, and days payables outstanding (num = ending BS item; denom = IS item / 365) 8) Cash conversion cycle Activity ratios are measures of how effectively an enterprise is using its assets. "Activity = Assets"

(F2 M5) What is a tag as it relates to XBRL? (S)

A tag is a machine-readable code that gives a standard definition for each line item in an income statement, cash flow statement, balance sheet, or other financial or nonfinancial data, including data contained in the notes to the financial statements. Tags include descriptive labels, definitions, references to US GAAP, and other elements that provide contextual information that allow data to be recognized and processed by software.

(F2 M5) What is a taxonomy as it relates to XBRL? (S)

A taxonomy defines the specific tags used for individual items of business and financial data. Taxonomies include: XBRL US GAAP Financial Reporting Taxonomy XBRL IFRS Taxonomy Industry Specific Taxonomies Etc.

(F2 M4) Discuss the treatment of operating segments that were deemed reportable in the preceding period that do not meet criteria for reportability in the current period. (S)

An operating segment that was deemed to be reportable in the immediately preceding period but that does not meet the criteria for reportability in the current period may continue to be reported separately if management judges the segment to have continuing significance.

(F2 M3) What is meant by an "orderly transaction" as it relates to fair value measurement? (S)

An orderly transaction is one in which the asset or liability is exposed to the market, for a period before the measurement date, long enough to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities (cannot be a forced transaction (ex. court ordered, bankruptcy).

(F2 M7) How is the current ratio computed and interpreted? (B)

Current assets ÷ Current liabilities = Current ratio Measures a company's ability to meet its short-term obligations. A higher ratio indicates LESS risk.

(F2 M4) Discuss the treatment of operating segments that were not deemed reportable in the preceding period that meet criteria for reportability in the current period. (S)

If an operating segment that was not deemed to be reportable in the prior period meets the criteria for reportability in the current period, segment data for prior periods presented should be restated to reflect the newly reportable segment.

(F2 M3) When may an entity be exempt from the fair value measurement requirement? (O)

If it is not practicable to measure, cannot be reasonably determined, or cannot be measured with sufficient reliability.

(F2 M4) What is the 75% test for identifying reportable segments? (B)

If the combined external (consolidated) revenue of all reportable segments is less than 75% of the total consolidated revenue of the entity, additional operating segments need to be identified (until 75% is met) as reportable segments, even if they do not meet the 10% test. The practical limit is 10 segments, but this is not a precise limit.

(F2 M4) Regarding segment reporting, what should be disclosed in the "all other segments" category? (S)

Information about other business activities and operating segments that are not reportable based on 10% test or 75% test should be combined and disclosed in an "all other segments" category.

(F2 M7) How is the days in inventory ratio computed and interpreted? (S)

Ending inventory ÷ (Cost of goods sold ÷ 365) = Days in inventory Indicates the average number of days required to sell inventory. A little lower (i.e. faster) than the standard is ideal.

(F2 M7) How is the days in accounts receivable ratio computed and interpreted? (S)

Ending net accounts receivable ÷ (Net sales ÷ 365) = Days in accounts receivable Indicates the average number of days required to collect accounts receivable. A lower ratio is considered better.

(F2 M3) When determining the fair value of land/PPE, what must be included in the calculation of fair value? (S/M)

Estimated demolition (and related) costs must be deducted from the asset's carrying value.

(F2 M3) When are transportation costs included in the determination of fair value? (S/M)

Fair value may include transportation costs if location is an attribute of the asset or liability.

(F2 M4) What are the disclosure requirements for reportable operating segments? (B)

For each reportable segment, the entity must report ("IPAD DAPR"): 1) [I]dentifying factors (used to identify reportable segments) 2) [P]roducts or services (from which revenues are derived) 3) [A]sset [D]etail 4) Measurement criteria ([D]ifferences in [A]ccounting principles used compared to the consolidated statements) 5) [P]rofit or loss detail (should distinguish between amount of external sales and intercompany sales) 6) [R]econciliations (to consolidated statements)

(F2 M5) Describe Form 10-K and Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms? (B)

Form 10-K - filed annually by US registered companies (issuer). Includes a summary of financial data, MD&A, and audited financial statements prepared using US GAAP. Form 10-Q - filed quarterly by US registered companies (issuer). Includes unaudited financial statements, interim MD&A, and certain disclosures.

(F2 M5) What is the purpose of Form 11-K? (S)

Form 11-K is the annual report of a company's employee benefit plan(s).

(F2 M5) What is the purpose of Form 6-K? (S)

Form 6-K is filed semi-annually by foreign private issuers. It is similar to Form 10-Q and contains unaudited financial statements, interim period MD&A, and certain disclosures.

(F2 M5) What is the purpose of Form 8-K? (S)

Form 8-K is filed to report major corporate events such as corporate asset acquisitions or disposals, changes in securities and trading markets, changes to accountants or financial statements, and changes in corporate governance or management.

(F2 M5) What are the purposes of Forms 3, 4, and 5? (S)

Forms 3, 4, and 5 are required to filed by directors, officers, or beneficial owners of more than 10% of a class of equity securities of a registered company.

(F2 M1) Identify the contents of the 'Summary of Significant Accounting Policies' note to the financial statements. (B)

Identifies measurement bases, accounting principles, and methods used in preparing the financial statements. High-level only.

(F2 M6) When converting from the cash-basis to accrual-basis, discuss the treatment of beginning and ending balances when performing calculations. (S)

If an item has a direct relationship (that is, increases are added and decreases are subtracted) the ending balance is added and the beginning balance is subtracted (ex. A/P when converting to COGS). If an item has an indirect relationship (that is, increases are subtracted and decreases are added) the beginning balance is added and the ending balance is subtracted (ex. Inventory when converting to COGS)

(F2 M5) What are the filing deadlines for Form 10-Q for large accelerated filers, accelerated filers, and all other registrants? (O)

Large accelerated filers and accelerated filers must file in the 40 days following the end of the fiscal quarter. All other registrants must file in the 45 days following the end of the fiscal quarter.

(F2 M5) What are the filing deadlines for Form 10-K for large accelerated filers, accelerated filers, and all other registrants? (O)

Large accelerated filers must file within 60 days of fiscal year end. Accelerated filers must file within 75 days of fiscal year end. All other registrants must file within 90 days of fiscal year end.

(F2 M5) What are the four levels of financial statement schedule tagging as it relates to XBRL? (S)

Level 1 - Each complete footnote and schedule is tagged as a single block of text. Level 2 - Each significant accounting policy within the significant accounting policies footnote is tagged as a single block of text. Level 3 - Each table within each footnote or schedule is tagged as a separate block of text. Level 4 - Within each footnote or schedule, each amount (monetary value, percentage, number, etc.) is required to be separately tagged.

(F2 M3) Discuss the hierarchy of fair value inputs and their priority. (B)

Level 1 inputs include quoted market prices in active markets for IDENTICAL assets or liabilities (most preferred). Level 2 inputs include inputs other than quoted market prices that are directly or indirectly observable for an asset or liability (typically 'SIMILAR' or 'identical' assets in inactive markets) Level 3 inputs include unobservable inputs for the asset or liability that reflect the entities' assumptions and are based on the best available information (include DFCFs and historical performance/return, mgmt's assumptions) (least preferred).

(F2 M5) What level(s) of tagging is required for a company's first XBRL submission and subsequent submissions? (S)

Level 1 tagging is required for the company's first XBRL submission. Starting one year from the filer's initial submission, all levels of tagging are required.

(F2 M3) What are market participants? (S)

Market participants are buyers and sellers who are independent (not related parties) knowledgeable about the asset or liability, and willing to transact for the asset or liability. They are considered to be acting in their economic best interest.

(F2 M7) How is the return on assets (ROA) ratio computed and interpreted? (S)

Net income ÷ Average total assets = Return on assets Measures the ability of an enterprise to turn assets into profit for the owners. The higher the ratio, the better.

(F2 M7) How is the return on equity (ROE) ratio computed and interpreted? (S)

Net income ÷ Average total equity = Return on equity Indicates how much profit a company earns with the money shareholders have invested. A higher ratio is better, but too high may not be sustainable.

(F2 M7) How is the profit margin ratio computed and interpreted? (S)

Net income ÷ Net sales = Profit margin Measures the ability of an entity to turn revenue into profit after first covering its costs. A higher ratio is better.

(F2 M7) How is the accounts receivable turnover ratio computed and interpreted? (S)

Net sales ÷ Average net accounts receivable = Accounts receivable turnover Indicates the receivables' quality and indicates the success of the firm in collecting outstanding receivables. A higher ratio indicates no problem collecting.

(F2 M7) How is the asset turnover ratio computed and interpreted? (S)

Net sales ÷ Average total assets = Asset turnover Indicator of how an enterprise makes effective use of its assets. A higher ratio indicates effective asset use to generate revenue.

(F2 M6) Discuss the treatment of non-taxable revenues and expenses on income tax basis financial statements. (S/M)

Non-taxable revenues and expenses may be reported (1) as separate line-items in the revenues/expense sections of the "income statement" (stmt of revs and exps and RE or stmt of income), (2) as additions/deductions to net income, or (3) via disclosure in a note.

(F2 M4) When may operating segments be aggregated into a single operating segment for reporting purposes? (S/B)

Operating segments that exhibit similar long-term financial performance may be aggregated if they have the same basic characteristics in each of these areas: 1) The nature of the [P]roducts and services; 2) The nature of the [P]roduction processes; 3) The type or [C]lass of [C]ustomer for the products and services; 4) The [M]ethods [U]sed to distribute the products or provide the services; and 5) If applicable, the nature of the [R]egulatory [E]nvironment (e.g. banking, insurance, or public utilities).

(F2 M5) What is the SEC's Interactive Data Rule? (O)

The SEC's Interactive Data Rule requires US public companies and foreign private issuers that use US GAAP, as well as foreign private issuers that user IFRS, to present financial statements and any applicable financial statement schedules in an exhibit prepared using XBRL. This exhibit is required with the filers' SEC registration statements, quarterly and annual reports, and reports 6-K and 8-K containing revised or updated financial statements.

(F2 M5) What statements are required to be presented for ANNUAL financial statements according to Regulation S-X? (S)

The annual financial statements should include: 1) Balance sheets for the two most recent fiscal years 2) Statement of income, changes in owners' equity, and cash flows for each of the three fiscal years preceding the date of the most recent audited balance sheet.

(F2 M3) What does "highest and best use" refer to in relation to fair value measurement? (S)

The fair value measurement of a non-financial asset (such as PP&E) takes into account the market participant's ability to generate economic benefits by using the asset in its highest or best use or by selling it to another market participant that would use the asset in its highest and best use. A reporting entity's current use of a non-financial asset is presumed to be its highest and best use, unless market or other factors suggest that a different use by market participants would maximize the value of the asset. The highest and best use concept is not relevant when measuring the fair value of financial assets (stocks) or the fair value of liabilities (bonds).

(F2 M5) What statements are required to be presented for INTERIM financial statements according to Regulation S-X? (S)

The interim financial statements should include: 1) Balance sheets (2 yrs) as of the end of the most recent fiscal quarter and as of the end of the preceding fiscal year 2) Income statements (3 yrs) for the most recent fiscal quarter, for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the corresponding periods of the preceding fiscal year. 3) Statements of cash flows (2 yrs) for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the corresponding period for the preceding year.

(F2 M3) The level in the fair value hierarchy in which a fair value measurement falls is determined by what? (S/M)

The lowest level input that is SIGNIFICANT to the fair value measurement

(F2 M6) What is the modified cash basis of accounting? (S)

The modified cash basis is a hybrid method that includes elements of both cash basis and accrual basis accounting. Modifications made to cash basis financial statements should have substantial support. Common modifications include capitalizing/depreciating fixed assets and recording liabilities.

(F2 M6) What adjustments are required to convert a cash basis (or modified cash basis) income statement to the accrual basis? (S)

The primary adjustments required to convert from cash basis (or modified cash basis) to accrual basis include: 1) Converting cash basis revenue to accrual basis revenue 2) Converting cash paid for purchases to accrual basis COGS 3) Converting cash paid for operating expenses to accrual basis operating expenses. However, additional adjustments may be needed to recognize non-cash expenses (such as depreciation), capitalize purchases of fixed assets, record debt proceeds/payments, etc.

(F2 M3) What is the difference between the "principal market" and "most advantageous market" for an asset or liability? (O)

The principal market is the market with the greatest VOLUME or LEVEL of activity for the asset or liability that the reporting entity has access to at the measurement date. If there is no principal market, the most advantageous market should be used to determine fair value. --> The most advantageous market is the market with the BEST PRICE for the asset or liability after considering transaction costs (and transportation costs, if necessary). The most advantageous market is only used to determine fair value when there is no principal market. NOTE: though transaction costs are used to determine the most advantageous market, they are not included in the final FV measurement. Transportation costs may be included, however.

(F2 M6) What adjustments are required to convert a cash basis (or modified cash basis) balance sheet to the accrual basis? (S)

The pure cash basis balance sheet reports only cash and equity. A modified cash balance sheet may include items like inventory, investments, and liabilities. To convert, all assets and liabilities existing at year-end that are not already included on the balance sheet must be added, with equity equal to the difference between total assets and total liabilities (plug figure).

(F2 M1) What do the notes to the financial statements (excluding the summary of significant accounting policies) contain? (O)

The remaining notes contain all other information relevant to decision makers. These notes are used to disclose facts not presented in either the body of the financial statements or in the summary of significant accounting policies (should not duplicate/REPEAT information found elsewhere). Examples include: material information regarding significant asset/liability balances, changes in stockholders' equity, subsequent events, and contingency losses (both probable and reasonably estimable).

(F2 M2) What is the subsequent event evaluation period and how does it differ between public and private entities? (O)

The subsequent event evaluation period refers to the period through which an entity must evaluate subsequent events. Public companies must evaluate subsequent events through the date that the financial statements are issued. Private companies must evaluate subsequent events through the date that the financial statements are available to be issued and must disclose the date through which subsequent events have been evaluated.

(F2 M7) How is the total debt ratio computed and interpreted? (S)

Total liabilities ÷ Total assets = Total debt ratio Indicates what percentage of a company's assets are financed by creditors. Too high may indicate increased risk and higher ROE.

(F2 M7) How is the debt-to-equity ratio computed and interpreted? (S)

Total liabilities ÷ Total equity = Debt-to-equity ratio Indicates the degree of protection to creditors in case of insolvency. A lower rate implies lower risk, but also a lower ROE.

(F2 M4) How are intercompany transactions treated for the purpose of segment reporting? (S)

Transactions between the segments of an entity are not eliminated in a consolidation between the parent company and subsidiaries.

(F2 M6) What are the differences between revenues and expenses under the cash basis and accrual basis of accounting? (O)

Under the cash basis of accounting, revenues are recognized when cash is received, and expenses are recognized when cash is paid. Under the accrual basis of accounting, revenue is recognized when realized (or realizable) and earned, while expenses are recognized when incurred, owed, or the corresponding benefit has been received.

(F2 M2) When financial statements are reissued, how should an entity recognize subsequent events that occurred after original issuance? (O)

When an entity reissues its financial statements, the entity should not recognize events that occurred between the date the original financial statements were issued (or available to be issued) and the date the financial statements were reissued, unless an adjustment is required by GAAP or other regulatory requirements.